3 Factors that Can Hinder Startup Capital

From May 15-17, Tech Crunch hosted an event focused on startups on Pier 36 in New York City. Their goal was to connect with some of the top minds in entrepreneurship and venture capitalism. For example, the event featured opening remarks from legendary New York Yankee Derek Jeter and Jaymee Messler of The Players' Tribune, the sports-themed startup that has thus far raised nearly $60 million in capital. As different speakers covered many topics throughout the day, I was especially intrigued by the push for a shift in venture capitalism regarding impact from government, new locations, and genders.

Derek Jeter (left) and Jaymee Messler (center) talk with TechCrunch's editor-in-chief Matthew Panzarino (right) about their work with The Players' Tribune to kick off the 2017 Tech Crunch.

Government

While engineers might not want to get into politics as they affect their work or industries, venture capitalists (VCs) are very aware of those aspects. The first Tech Crunch panel featured Stuart Ellman of RRE Venture, Maha Ibrahim from Canaan Partners, and Amish Jani with First Mark Capital. Ellman mentioned that, like in nature, entrepreneurs will follow the path of least resistance. This means they will find somewhere with lower taxes and fewer regulations. However, Jani added, “A lot of tech companies are having some state and local issues, but when you are dealing with the federal government, you’re talking about big companies.” That doesn’t dismiss Ellman’s point, but does put into perspective that there are levels in government to consider.

We live in a time when big companies like Uber are feeling government pushback. This is mainly on a local or state level, not the federal. If companies like Uber fail, it will not be due to lack of people wanting the service, the speakers noted. Despite Denmark recently outlawingUber, for example, the people there are finding creative ways to still have the service.

One workaround is to ask the Uber driver to transport your bag. Then you ask if it would be okay to accompany the bag while it is delivered. This is just one ridiculous example that shows that governments will not be able to police tech companies. If they try, it could be an expensive pursuit.

Tech companies are designed with smart people that know how to get things done - quickly, efficiently, and with the best technology available. The government has been noted on repeated occasions to not accomplish things quickly or efficiently. For example, many departments of the government still have warehouses of paper files that are manually filed.

In government as well as companies, they noted that it is important to have a balance between business and engineering. Jani mentioned, “You don’t want to shut out the people that know how to do things and get things done.” The panel implied that this message especially needed to be heard by business managers and their engineers and the government when it came to immigration.

“We live off of immigrants and limiting H1-B1 visas is a horrible idea,” Ibrahim said. Many immigrants are moving into the tech startup space, which make the innovation in the US tightly tied to our immigration policy. “One of the interesting things about tech startups is they’re all about merit,” noted Ellman. “It doesn’t matter who you are or who you know. It’s about what you can do.” This may be why we have seen immigrants getting into technology businesses.

Location

While VCs are always happy if their funding is not wrapped up in regulations and taxes, they also don’t want to travel too far to work with a startup. AOL co-founder Steve Case says, “VCs will drive to a company but not fly.” California, New York, and Massachusetts received around 80% of the startup money in the US, both previously and presently. Case mentioned that a VC might not go to a lesser-known town or area to invest. Because VCs don’t want to go to some of these other areas, there is less competition. This leads to startups in other areas to have their startups undervalued by about 30%.

However, the internet and social media is impacting this scenario. With a winning combination of direct contact with customers, smaller towns that need startups for job creators, and VCs starting to take up micro-investing, the states that were left behind are starting to get some attention. “Over the next decade, we will see tech companies spread into other states,” says Case. This should really change the investing and tech startup markets.

Gender

Once you’ve got a startup-friendly government and either a good location or strategy to mitigate the location to VCs, your experience still will be impacted by your gender. According to an article from Bloomberg, “For starters, it helps to be a man. The vast majority of venture capital goes to companies founded by men. Just 7% of the 2,005 founders on the report’s list were women. Companies founded by women also get less money—an average of $77 million compared with $100 million for male-led startups. That shortfall parallels the overall U.S. pay gap, where women are paid an average of 79 cents for every dollar earned by men.” This reduced VC is close to the “location discount” mentioned earlier.

Among the organizations trying to correct this issue is ELEVACAO Foundation. Founded in New York City, ELEVACAO empowers women entrepreneurs build and launch successful tech companies. When asked, “What is the biggest thing or skill women need to make sure they are getting fair evaluations for their companies,” the answer is, “Confidence.” Women tend to give in easier to VCs throwing out lower offers. Such offers reflect that either the VCs don’t have the confidence in a women’s startup or they know women are more likely to accept a lower offer than a man. “They need to know the right answers and know how to present themselves, but they need the confidence to stand their ground,” says Marisa Warren, founder of ELEVACAO. “According to a recent Bloomberg study, only 3% of tech firms are founded by women, yet when funded, they deliver 35% higher ROI than male-led firms! In addition, I’m finding that many of the women we work with will have some type of community or charity built into their business plan.” So investing in women can produce a better ROI and a positive impact on the community.

Technology is changing more quickly every day. This is making startup life more exciting, dynamic, and also challenging. These major issues, for example, are only a small part of what was covered on day one at Tech Crunch Disrupt NY 2017. If you have a chance to go, it is an interesting event. From engineers to industry to government, we need to understand how attitudes, behaviors, and lawsare impacting the future of technology and what should be done to change them.